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Torrent to merge with JB Chemicals & Pharmaceuticals

Torrent Pharma announced acquisition of KKR stake in JB chemical as well as potential merger with the company. We believe the proposed merger between Torrent Pharma and JB Chemicals is positive from a business standpoint, as it will elevate Torrent Pharma to the position of the 5th largest pharmaceutical company in India, up from its current 7th position. The merger will also strengthen Torrent's presence in key international markets such as Russia, South Africa, and RoW branded generics, as well as enhance its capabilities in the CDMO segment. Although JB Chemicals has been operating efficiently under KKR's ownership, the merger is expected to unlock further value through the reduction of corporate costs and potential synergies in the field force, particularly as both companies have a strong presence in cardiology and gastroenterology therapies.

From a financial perspective, we estimate that with synergies, the merger would become PAT neutral by the end of FY28, assuming the open offer does not go through. The company is likely to achieve a net debt-free position by FY29. However, under this scenario, existing Torrent shareholders would face approximately 10% dilution, given the higher number of shares required to complete the merger. If maximum number of shareholder opt for open offer then the dilution could be 6% for Torrent Pharma shareholders, however, PAT could be impacted by 10% for FY28. Assuming a 23x EV/EBITDA multiple on the combined entity's FY27 EBITDA which is Torrent' multiple at standalone level, we estimate the share price of the merged entity to be in the range of INR 3,625 to INR 3,635, suggesting 7% upside for Torrent Pharma shareholders in the near term.

We expect further clarity to emerge following Torrent Pharma's investor call scheduled for today. We will revise our view if there are any material changes to our assumptions.

* Contours of the deal: Torrent has announced the acquisition of 74.5mn (46.4%) shares of JB Chemicals & Pharmaceuticals from the promoter seller for a consideration of INR 119.2bn. This is followed by further plans to acquire 4.5mn (2.8%) employee shares at value not exceeding INR 1,600/sh. The deal also includes an open offer for 41.7mn (26%) shares for the price of INR 1639.18/sh. Upon the merger, the company shall issue shares to shareholders of JB in the ratio 51:100

* Rationale for merger: JB Pharma has business segments in the same markets where Torrent operates, thus (via the merger) enabling incremental growth prospects for Torrent via combined and enhanced synergistic product portfolio. The deal provides access to a fast growing India franchise, with leading brands in the chronic segment, and entry into untapped therapeutic areas like ophthalmic and strengthening existing portfolios like Cardiac and Gastro. On a long term view, the deal also opens possibilities of platform diversification with entry into the CDMO segment. The merger also entails the cessation of multiple entities thus unlocking cost efficiencies along with new operational leverages from asset integration.

* Debt backed funding: For the first two tranches of the transaction, Torrent Pharma requires INR 122bn in cash. For the third tranche, which involves an open offer at INR 1,639 per share, the company would require an additional INR 66.35bn, assuming full acceptance of the open offer for a 26% stake in JB Chemicals. In total, Torrent Pharma would require up to INR 188.9bn to complete all three tranches of the acquisition.

* Dilution for Torrent's shareholders: Assuming Torrent Pharma holds a 75% stake in JB Chemicals post the open offer, the company will need to issue approximately 20mn additional shares to the minority shareholders of JB Chemicals as part of the merger process. This will dilute the shareholding of existing Torrent Pharma shareholders by approximately 5.57% in the combined entity. If open offer doesn't go through then Torrent will need to issue higher number of shares and resulting in maximum 10% dilution for Torrent Pharma shareholders

* Company's financial position to fund the acquisition: As per FY25 estimates, Torrent Pharma has INR 23.35bn of net debt on its books. The acquisition will be primarily funded through debt. Depending on the level of open offer acceptance, the company may need to raise between INR 120bn to 180bn in additional debt to finance the transaction.

* Impact on financials: On a consolidated basis, and excluding synergies, the combined entity is projected to generate INR 219.5bn in revenue and INR 71bn in EBITDA by FY28. Assuming 5% cost synergies from JB Chemicals, EBITDA could increase to INR 74bn by FY28. Over FY26 to FY28, the combined entity is expected to generate INR 131bn in free cash flow (FCF). After accounting for INR 36bn dividend payout and approx INR 28bn for Interest payment, combined entity could retain only INR 50bn net debt by FY28 and become debt free by FY29 (assuming open offer doesn't go through)

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